Makers of consumer electronics, such as laptops and smartphones, are facing chip shortages as chip demand within the AI data centers skyrockets. These shortages in the consumer electronics industry are happening even if the type of chips they require differs from those needed in data centers.
The chips used in consumer electronics need to use minimal power, be tightly integrated within the device and be thermally efficient. In contrast, the chips required in data centers are usually optimized for maximum memory bandwidth, high storage throughput and extended compute power.
Consumer electronics chips are therefore designed to combine their storage and processing capabilities within the same component, while those for AI data centers feature GPUs (graphics processing units) and memory chips with high bandwidth.
So, if the two segments require totally different kinds of chips, why is the consumer electronics segment feeling the squeeze as more AI data centers are planned and built? The short answer lies in supply chains.
Chipmakers have gone through several cycles of excess capacity and tight supply, such as after the collapse of the dot-com bubble when overcapacity caused many fabs to go under, and in the 2010s when chip shortages were widespread. Every time there is excess production capacity, a number of industry players go belly up and the industry consolidates.
When supply shortages hit, production is expanded by the remaining players, only for capital to be tied up in costly production lines when demand slumps and production has to be curtailed. The AI boom has come when the existing chipmakers have gone through several of these ups and downs within the segment.
As a result, not many are willing to quickly expand their production to meet the exploding demand because history has taught them to be cautious about rushing to ramp up too quickly as a result of a spike in demand.
The market has therefore preferred to shift production to chips with high margins while cutting production of chips that aren’t highly profitable. In this case, focus has gone to manufacturing AI chips for data centers while squeezing production of the type of chips needed in consumer electronics.
For example, TSMC, which commands about 70% of the global foundry market, prioritizes orders from Nvidia and other AI chip designers since these are more profitable to make. On its part, Nvidia commands about 85% of the market for the chips used in AI data centers, so its business crowds out orders for consumer electronics chips.
It is very expensive and time-consuming to design and construct new foundries, so for now, the prospects of relief for companies needing consumer electronics chips don’t look too good. Prices of consumer electronics like laptops and smartphones are edging upwards as a result of the challenges linked to chip supplies, and some manufacturers are absorbing some of those cost increases without passing them on to consumers, squeezing their margins.
In contrast, companies like Broadcom Inc. (NASDAQ: AVGO) that provide software solutions to AI data centers and other industries are seeing their revenues and margins rising as the data center boom shows no sign of peaking.
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